Table of Contents













UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549








FORM 10-Q








þ
     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010.ORo
     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________ TO _______________




Commission file number: 0-22187








RENAISSANCE LEARNING, INC.

(Exact name of Registrant as specified in its charter)



Wisconsin
     39-1559474(State or other
jurisdiction of incorporation)
     (I.R.S. Employer
Identification No.)




2911 Peach Street

P.O. Box 8036

Wisconsin Rapids, Wisconsin

(Address of principal executive offices)



54495-8036

(Zip Code)



(715) 424-3636

(Registrants telephone number, including area code)








Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.YesþNoo



Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).YesoNoo



Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check One): Large accelerated fileroAccelerated filerþNon-accelerated filero(Do not check if a smaller reporting company)    Smaller reporting companyo



Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).YesoNoþ



Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.



Class
     
     Outstanding at
July 30, 2010Common Stock, $0.01 par value
     
     29,332,702












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RENAISSANCE LEARNING, INC.  INDEX TO FORM 10-Q  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010  PART I  FINANCIAL INFORMATIONPageItem 1.
     Financial StatementsCondensed Consolidated Balance Sheets at June 30, 2010 and December 31, 2009
     1Condensed Consolidated Statements of Income for the Three Months and Six Months Ended June 30, 2010 and 2009
     2Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009
     3Notes to Condensed Consolidated Financial Statements
     4Item 2.
     Managements Discussion and Analysis of Financial Condition and Results of Operations
     8Item 3.
     Quantitative and Qualitative Disclosures About Market Risk
     15Item 4.
     Controls and Procedures
     16PART IIOTHER INFORMATIONItem 1A.
     Risk Factors
     16Item 2.
     Unregistered Sales of Equity Securities and Use of Proceeds
     16Item 6.
     Exhibits
     17


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Table of Contents  PART I - FINANCIAL INFORMATION  Item 1.Financial Statements  RENAISSANCE LEARNING, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)  (In Thousands, Except Share and Per Share Amounts)
     
     June 30, 
2010
     
     December 31,
2009ASSETSCurrent assets:Cash and cash equivalents
     
     $
     41,029
     
     $
     36,207Investment securities
     
     
     5,086
     
     
     3,278Accounts receivable, less allowance of $1,108 and $1,392, respectively
     
     
     13,525
     
     
     10,535Inventories
     
     
     2,266
     
     
     4,290Prepaid expenses
     
     
     1,374
     
     
     1,962Income taxes receivable
     
     
     2,167
     
     
     3,679Deferred tax asset
     
     
     3,827
     
     
     3,827Other current assets
     
     
     597
     
     
     629Total current assets
     
     
     69,871
     
     
     64,407Investment securities
     
     
     3,069
     
     
     4,650Property, plant and equipment, net
     
     
     6,862
     
     
     6,848Deferred tax asset
     
     
     2,464
     
     
     2,808Goodwill
     
     
     2,828
     
     
     2,827Other intangibles, net
     
     
     790
     
     
     897Capitalized software, net
     
     
     
     
     
     22Other non-current assets
     
     
     610
     
     
     807Total assets
     
     $
     86,494
     
     $
     83,266LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
     
     $
     2,497
     
     $
     921Deferred revenue
     
     
     46,089
     
     
     54,224Payroll and employee benefits
     
     
     8,017
     
     
     5,404Other current liabilities
     
     
     2,446
     
     
     2,648Total current liabilities
     
     
     59,049
     
     
     63,197Deferred revenue
     
     
     7,266
     
     
     5,262Deferred compensation and other employee benefits
     
     
     1,893
     
     
     1,871Income taxes payable
     
     
     3,765
     
     
     4,801Other noncurrent liabilities
     
     
     264
     
     
     184Total liabilities
     
     
     72,237
     
     
     75,315Shareholders equity:Common stock, $.01 par; shares authorized: 150,000,000; issued:  34,736,647 shares at June 30, 2010 and 
December 31, 2009
     
     
     347
     
     
     347Additional paid-in capital
     
     
     51,085
     
     
     51,159Retained earnings
     
     
     55,960
     
     
     50,255Treasury stock, at cost: 5,422,338 shares at June 30, 2010; 5,461,905 shares at December 31, 2009
     
     
     (92,949
     )
     
     (93,659
     )Accumulated other comprehensive income (loss)
     
     
     (186
     )
     
     (151
     )Total shareholders equity
     
     
     14,257
     
     
     7,951Total liabilities and shareholders equity
     
     $
     86,494
     
     $
     83,266
  See accompanying notes to condensed consolidated financial statements.   -1-


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Table of Contents  RENAISSANCE LEARNING, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)  Three Months Ended June 30,
     
     Six Months Ended June 30,(In Thousands, Except per Share Amounts)
     
     2010
     
     2009
     
     2010
     
     2009Net Sales:Products
     
     $
     21,514
     
     $
     21,208
     
     $
     43,353
     
     $
     41,870Services
     
     
     9,533
     
     
     7,256
     
     
     19,917
     
     
     15,465Total net sales
     
     
     31,047
     
     
     28,464
     
     
     63,270
     
     
     57,335Cost of sales:Products
     
     
     3,700
     
     
     3,913
     
     
     7,197
     
     
     6,910Services
     
     
     2,948
     
     
     2,445
     
     
     6,440
     
     
     5,351Total cost of sales
     
     
     6,648
     
     
     6,358
     
     
     13,637
     
     
     12,261Gross profit
     
     
     24,399
     
     
     22,106
     
     
     49,633
     
     
     45,074Operating expenses:Product development
     
     
     4,197
     
     
     3,927
     
     
     8,296
     
     
     8,378Selling and marketing
     
     
     10,158
     
     
     8,403
     
     
     20,504
     
     
     17,325General and administrative
     
     
     3,112
     
     
     3,170
     
     
     6,513
     
     
     6,633Total operating expenses
     
     
     17,467
     
     
     15,500
     
     
     35,313
     
     
     32,336Operating income
     
     
     6,932
     
     
     6,606
     
     
     14,320
     
     
     12,738Other income, net
     
     
     22
     
     
     34
     
     
     261
     
     
     183Income before taxes
     
     
     6,954
     
     
     6,640
     
     
     14,581
     
     
     12,921Income taxes
     
     
     2,650
     
     
     2,510
     
     
     4,494
     
     
     4,884Net income
     
     $
     4,304
     
     $
     4,130
     
     $
     10,087
     
     $
     8,037Earnings per share:Basic and diluted
     
     $
     0.15
     
     $
     0.14
     
     $
     0.34
     
     $
     0.28Cash dividends declared per share
     
     $
     0.08
     
     $
     0.07
     
     $
     0.15
     
     $
     0.14
  See accompanying notes to condensed consolidated financial statements.    -2-


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Table of Contents  RENAISSANCE LEARNING, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)  Six Months Ended June 30,(In Thousands)
     
     2010
     
     2009Reconciliation of net income to net cash provided by operating activities:Net income
     
     $
     10,087
     
     $
     8,037Adjustments to arrive at cash provided by operating activities:Depreciation and amortization
     
     
     1,229
     
     
     1,368Amortization of investment discounts/premiums
     
     
     (20
     )
     
     27Share-based compensation expense
     
     
     783
     
     
     798Deferred income taxes
     
     
     344
     
     
     (7
     )Gain on sale of property
     
     
     (1
     )
     
     (108
     )Change in assets and liabilities, excluding the effects 
of acquisitions and divestitures:Accounts receivable
     
     
     (2,989
     )
     
     (4,883
     )Inventories
     
     
     2,024
     
     
     1,569Prepaid expenses
     
     
     588
     
     
     619Income taxes
     
     
     522
     
     
     1,342Accounts payable and other liabilities
     
     
     4,068
     
     
     2,579Deferred revenue
     
     
     (6,132
     )
     
     (6,048
     )Other
     
     
     (139
     )
     
     (312
     )Net cash provided by operating activities
     
     
     10,364
     
     
     4,981Cash flows from investing activities:Purchase of property, plant and equipment
     
     
     (916
     )
     
     (217
     )Purchase of investment securities
     
     
     (2,085
     )
     
     Maturities/sales of investment securities
     
     
     1,985
     
     
     2,740Net proceeds from sale of property
     
     
     3
     
     
     774Net cash (used) provided by investing activities
     
     
     (1,013
     )
     
     3,297Cash flows from financing activities:Proceeds from exercise of stock options
     
     
     3
     
     
     Excess tax benefits from share-based payment arrangements
     
     
     47
     
     
     22Dividends paid
     
     
     (4,382
     )
     
     (4,077
     )Purchase of treasury stock
     
     
     (197
     )
     
     (111
     )Net cash used by financing activities
     
     
     (4,529
     )
     
     (4,166
     )Net increase in cash and cash equivalents
     
     
     4,822
     
     
     4,112Cash and cash equivalents, beginning of period
     
     
     36,207
     
     
     9,509Cash and cash equivalents, end of period
     
     $
     41,029
     
     $
     13,621
  See accompanying notes to condensed consolidated financial statements.    -3-


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Table of Contents  RENAISSANCE LEARNING, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   1.Consolidation  The consolidated financial statements include the financial results of Renaissance Learning, Inc. (Renaissance Learning) and our subsidiaries (collectively, the Company).  2.Basis of Presentation  The condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) which are, in our opinion, necessary for a fair presentation of the results of the interim periods, and are presented on an unaudited basis. These financial statements should be read in conjunction with the financial information contained in our Annual Report on Form 10-K for the year ended December 31, 2009 (2009 Annual Report), which is on file with the U.S. Securities and Exchange Commission (the SEC). The results of operations for the three and six month periods ended June 30, 2010 and 2009 are not necessarily indicative of the results to be expected for the full year.  3.Earnings Per Common Share  Basic earnings per common share (Basic EPS) is computed by dividing net income by the weighted average number of common shares and participating securities outstanding during the period. Participating securities include unvested restricted share awards that have a nonforfeitable right to dividends or dividend equivalents. Common shares and participating securities issued or reacquired during the period are weighted for only the portion of the period during which they were outstanding.  Diluted earnings per common share (Diluted EPS) has been computed based on the weighted average number of common shares and other participating securities outstanding, increased by the number of additional common shares that would have been outstanding if the potentially dilutive stock option shares and non-participating restricted share awards had been issued.  Weighted average shares outstanding:Three Months ended June 30,
     
     Six Months Ended June 30,2010
     
     2009
     
     2010
     
     2009Basic weighted average shares outstanding
     
     
     29,309,059
     
     
     29,220,404
     
     
     29,299,214
     
     
     29,201,153Dilutive effect of non-participating restricted shares
     
     
     673
     
     
     16
     
     
     640
     
     
     8Dilutive weighted average shares outstanding
     
     
     29,309,732
     
     
     29,220,420
     
     
     29,299,854
     
     
     29,201,161
  The computation of Diluted EPS does not assume conversion, exercise, or contingent issuance of securities that may have an antidilutive effect on earnings per share (Antidilutive Securities).  Antidilutive Securities include: (i) stock options with an exercise price greater than the average market price for the period, (ii) non-participating restricted stock awards with a grant price greater than the average market price for the period, (iii) non-participating restricted stock awards with unearned compensation costs attributable to future service which exceed the average market price for the period, and (iv) in a period with a loss, all stock options and non-participating restricted stock awards.  For the three months and six months ended June 30, 2010, the number of Antidilutive Securities was 593,349.  For the three months and six months ended June 30, 2009, the number of Antidilutive Securities was 681,301.  4.Comprehensive Income  Our comprehensive income includes net income and foreign currency translation adjustments.  For the quarters ended June 30, 2010 and 2009, comprehensive income was $4.3 million for both quarters.  For the first six months ended June 30, 2010 and 2009, comprehensive income was $10.1 million and $8.2 million, respectively.    -4-


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Table of Contents  5.Goodwill and Other Intangible Assets  Under Generally Accepted Accounting Principles in the United States (US GAAP), goodwill is not amortized and we are required to assess goodwill at least annually for impairment by applying a fair value-based test.  Other intangibles consist of customer relationships acquired in connection with the purchase of AlphaSmart, Inc. (AlphaSmart). The customer relationships intangible asset is amortized over its useful life of ten years, on the declining balance method. For the three months ended June 30, 2010 and 2009, amortization expense related to the customer relationships intangible was $53,000 and $70,000, respectively.  For the six months ended June 30, 2010 and 2009, amortization expense related to the customer relationships intangible was $107,000 and $141,000, respectively.  Customer Relationships(In Thousands)
     
     June 30, 2010
     
     December 31, 2009Gross amount
     
     $
     3,200
     
     
     3,200Accumulated amortization
     
     
     (2,410
     )
     
     (2,303
     )Net carrying value
     
     $
     790
     
     
     897
  6.Uncertain Tax Positions  During the first quarter of 2010, we settled a tax dispute with the state of Wisconsin. This resulted in the recognition of $1.1 million in tax benefits related to prior years which had been carried on our balance sheet at December 31, 2009 as non-current income taxes payable.  7.Equity Compensation  We value restricted stock awards at the closing market price of our common stock on the date of grant.  We granted restricted stock awards for 52,723 shares during the six months ended June 30, 2010, and granted restricted stock awards for 67,170 shares during the six months ended June 30, 2009.  The exercise prices for all options are equal to the fair market value of our common stock on the date the options were granted.  There were no options to purchase our common stock granted during the six months ended June 30, 2010 and June 30, 2009.  As of June 30, 2010, the total unearned compensation related to share-based compensation awards, net of estimated forfeitures, was $2.0 million, which will be amortized as expense over the weighted average remaining period of 2.4 years. For the six months ended June 30, 2010 and 2009, total share-based compensation expense was $0.8 million for both periods.  A summary of restricted stock award activity for the six months ended June 30, 2010 is as follows:  Nonvested Restricted Stock Awards
     
     Shares
     
     Weighted
average grant
date fair value
     
     Aggregate
intrinsic
valueBalance at January 1, 2010
     
     319,551
     
     $
     11.70
     
     $
     3,630,099
     (1)Granted
     
     52,723
     
     
     14.07Vested
     
     (45,876
     )
     
     15.07Forfeitures
     
     
     
     
     Balance at June 30, 2010
     
     326,398
     
     $
     11.61
     
     $
     4,794,787
     (2)(1) Calculated at the 12/31/09 closing market price at $11.36 per share(2) Calculated at the 6/30/10 closing maket price at $14.69 per share
    -5-


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Table of Contents  8.Fair Value Measurements  Certain of our assets and liabilities are reported at fair value in our consolidated financial statements.  US GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. As presented in the tables below, this hierarchy consists of three broad levels with level 1 inputs having the highest priority, followed by level 2, and lastly, level 3.  Level 1 inputs consist of quoted prices in active markets for identical assets and liabilities.  Level 2 inputs are other observable evidence of fair value, such as: quoted prices for similar assets and liabilities or other market-corroborated evidence of fair value. Level 3 inputs are unobservable evidence of fair market value, such as: a discounted cash flows model or other pricing model.  The table below provides fair value measurement information for these assets and liabilities as of June 30, 2010 and 2009.  The carrying values of cash and cash equivalents, accounts receivable, and accounts payable (including income taxes payable and accrued expenses), approximated fair value at June 30, 2010 and 2009 and accordingly those assets and liabilities are not presented in the following table.  Fair Value Measurements Using(In Thousands)
     
     Carrying
Amount
     
     Total Fair
Value
     
     Level 1
Inputs
     
     Level 2
Inputs
     
     Level 3
Inputs2010Current investment securities
     
     $
     5,086
     
     $
     5,086
     
     $
     
     
     $
     5,086
     
     $
     Non-current investment securities
     
     
     1,137
     
     
     1,138
     
     
     
     
     
     1,138
     
     
     Assets held related to SERP plan
     
     
     1,932
     
     
     1,932
     
     
     1,932
     
     
     
     
     
     2009Current investment securities
     
     $
     3,629
     
     $
     3,665
     
     
     
     
     $
     3,665
     
     $
     Non-current investment securities
     
     
     415
     
     
     415
     
     
     
     
     
     415
     
     
     Assets held related to SERP plan
     
     
     1,527
     
     
     1,527
     
     
     1,527
     
     
     
     
     
     
  9.Segment information  Our reportable segments are:  Educational Software and Services.This segment derives its revenue from our software products; services related to our software such as product support, professional development, hosting, and other technical services; scanners sold for use with our math software; our reading intervention products; and various classroom resources such as printed materials and motivational items.  Educational Hardware.This segment derives its revenue from our NEOs, 2Know! classroom response systems, and services such as professional development, and extended support plans sold in connection with these hardware products.  The accounting policies of the segments are the same as those described in our 2009 Annual Report, Note 3, Significant Accounting Policies. There are no intercompany transactions between the segments. All segment revenues are with external customers. International revenues and operations are not significant at this time.  We do not segregate assets by segments in assessing segment performance since substantially all assets are multi-use and shared between the two segments.  Depreciation and amortization included in segment gross profit is not material.    -6-


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Table of Contents  Segment results were as follows:  Segment Revenues:Three Months Ended June 30,
     
     Six Months Ended June 30,(In Thousands)
     
     2010
     
     2009
     
     2010
     
     2009Educational Software and Services
     
     $
     25,601
     
     $
     21,864
     
     $
     52,211
     
     $
     45,893Educational Hardware
     
     
     5,446
     
     
     6,600
     
     
     11,059
     
     
     11,442Consolidated Revenue
     
     $
     31,047
     
     $
     28,464
     
     $
     63,270
     
     $
     57,335
   Segment Gross Profit and Reconciliation to Net Income Before Taxes:Three Months Ended June 30,
     
     Six Months Ended June 30,(In Thousands)
     
     2010
     
     2009
     
     2010
     
     2009Educational Software and Services
     
     $
     21,777
     
     $
     18,777
     
     $
     44,208
     
     $
     39,342Educational Hardware
     
     
     2,622
     
     
     3,329
     
     
     5,425
     
     
     5,732Consolidated Gross Profit
     
     
     24,399
     
     
     22,106
     
     
     49,633
     
     
     45,074Consolidated Operating Expenses
     
     
     17,467
     
     
     15,500
     
     
     35,313
     
     
     32,336Other Income
     
     
     22
     
     
     34
     
     
     261
     
     
     183Consolidated Net Income Before Taxes
     
     $
     6,954
     
     $
     6,640
     
     $
     14,581
     
     $
     12,921
  10.Dividends  On April 21, 2010, our Board of Directors declared a quarterly cash dividend of $0.08 per share, payable June 1, 2010 to shareholders of record as of May 7, 2010.  11.Recent Accounting Pronouncements  In October 2009, the Financial Accounting Standards Board (FASB) issued an amendment to its previously released guidance on revenue arrangements with multiple deliverables. The pronouncement addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting and how the arrangement consideration should be allocated among the separate units of accounting.  The pronouncement may be applied retrospectively or prospectively for new or materially modified arrangements.  We adopted this new accounting standard on January 1, 2010. Adoption did not affect our consolidated financial statements.  In October 2009, the FASB issued an amendment to its previously released guidance on revenuearrangements for tangible products that include software elements.The pronouncement removes tangible products from the scope of the software revenue guidance if the products contain both software and non-software components that function together to deliver a products essential functionality and provides guidance on determining whether software deliverables in an arrangement that includes a tangible product are within the scope of the software revenue guidance.  The pronouncement may be applied retrospectively or prospectively for new or materially modified arrangements.  We adopted this new accounting standard on January 1, 2010. Adoption did not affect our consolidated financial statements.  12.Subsequent Event  On July 21, 2010, our Board of Directors declared a quarterly cash dividend of $0.08 per share, payable September 1, 2010 to shareholders of record as of August 6, 2010. The company has evaluated all subsequent events that occurred up to the time of the companys issuance of its financial statements.    -7-


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Table of Contents  Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations  Results of Operations - Consolidated  Our results of operations can be affected by many factors including the general economic environment, state and federal government budgetary decisions, and the length and complexity of the sales cycle for school districts. National trends, federal and state legislation, Department of Education administrative policies, and the way the foregoing align with our products and services can also impact our business.  We monitor several items, which are significant to the evaluation of our financial condition, operating results, business challenges, and strategic opportunities. Among the more important of these items are:  (i) Our success and trends in maintaining and expanding our customer base, particularly with respect to ourAccelerated Readersoftware and related services, which typically account for approximately 50% of our orders on an annual basis; (ii) The general state of K-12 educational funding in the United States; and (iii) The state of K-12 funding in certain large states, particularly California, Texas and Florida, which together make up about one-third of our total orders.  A key part of our business strategy for maintaining and expanding our customer base (and the related revenues) is to transition our traditional perpetual-license-based customers to our newer subscription-based software products. Our subscription-based products offer enhanced features, which provide greater value to our customers, thereby contributing to increased customer satisfaction. Our most popular subscription-based products, theEnterpriseversions, include much greater access to product content. The subscription-based products are offered with a hosting option, which makes implementation of our software much easier and greatly reduces the costs both to our customers to implement and to us to develop and support the software. Customers who transition to ourAccelerated ReaderEnterprisesubscription-based product from our perpetual-license products have increased their average annual spending by over $1,000 per school. Although this amount of incremental revenue could change due to customer mix and other factors including additional purchases of products and services, we expect that we will continue to see incremental revenue as our perpetual-license customers transition toAccelerated Reader Enterprise. We have also experienced an annual per customer revenue increase for our other subscription-based products, but the increase has been most significant with ourAccelerated ReaderEnterpriseproduct.  We track active usage of both our subscription and perpetual products via a variety of measures including active subscriptions, recent customer support requests or contacts, recent purchases of additional content, and recent participation in training or professional development events.  We continuously refine the criteria used to develop these  metrics in order to provide what we believe is the most useful information for managing and understanding our active customer base. The most current methodology is applied to develop any historical comparisons so that any presentation is on a consistent basis. Based on these criteria, our worldwide active customer counts for both our perpetual and subscription-based licenses were approximately the same at June 30, 2010 and December 31, 2009 as follows: Accelerated Reader  53,000, Accelerated Math  15,000, and STAR Reading or STAR Math  45,000.  We believe the percentage of customers using the subscription-basedEnterpriseversions of our reading and math products is an important indicator of the progress of this strategic growth initiative and the magnitude of the growth opportunities still existing with regard to this strategy. The percentage of customers using reading products is more critical sinceAccelerated Readeris our most significant product and because we have experienced a greater increase in per customer revenues fromAccelerated ReaderEnterprisecompared to our other subscription-based products. At the end of the second quarter of 2010, and at the end of 2009, approximately 45% of our active reading product customers were using theEnterpriseversion.    -8-


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Table of Contents  Our strategic transition to subscription-based software products has affected, and will continue to affect, our results of operations. Revenues from subscription-based software sales are not completely incremental to our results, as customers who make the transition no longer purchase annual support plans for our perpetual-license products, and those who purchase theEnterpriseversion also no longer purchase add-on content. Revenues under the subscription-based model are composed of both software and services. The gross profit margins from subscription-based software products are slightly higher than our historical gross profit margins on sales of perpetual-license software. The subscription-based software business tends to generate a sales mix somewhat more heavily weighted towards services. In addition, the services we sell with our subscription-based software products tend to have a somewhat higher gross profit margin than those sold with our perpetual-license software products.  The transition to subscription-based products has increased the seasonality of customer ordering patterns. Compared to orders for non-subscription-based offerings, customer orders of our subscription-based offerings tend to more closely follow school budgeting cycles. Currently, about 20% of our subscriptions have renewal dates in the second quarter and about 60% of our subscriptions have renewal dates in the third quarter.  Also, after customers convert to theEnterpriseversion, they no longer order reading quizzes and math libraries, since access to this content is included in their subscription. The combined effect is that a much greater proportion of a years orders are expected in the second quarter and, to an even greater extent, in the third quarter. Historically, our customers have ordered more of this content in the first and fourth quarters. Currently, we receive about 25% of our annual orders in the second quarter and about 40% in the third quarter.  Transitioning our customer base to subscription-based software can adversely impact orders for add-on reading quizzes and math libraries by causing customers who own our software under perpetual-license agreements to delay purchases of add-on content if they are contemplating converting to ourEnterpriseversion subscription-based products. Additionally, our subscription-based products are often sold at the school district level. District-level sales tend to be more complex, have a longer sales cycle, and are typically for a larger dollar amount than sales made to individual schools. Orders from district sales are more uneven and more difficult to accurately predict than individual school-level sales and, therefore, the timing of large district sales can significantly impact quarterly order levels.  As the transition to subscription-based products has progressed, we have built substantial balances of deferred subscription revenue. Since this deferred revenue is recognized ratably over the subscription period (generally twelve months), it reduces the volatility of our reported revenue. This means that revenues in a given period are not necessarily indicative of the orders placed by our customers for our products and services during a given period.  We expect that future changes in our products will likely result in the requirement to apply the service revenue recognition rules to subscription sales of our software when such software is hosted by us. The timing of this change is currently uncertain and will depend on, among other things: (i) how we license and price our products, (ii) what features are available in our products, and (iii) whether our customers run our products at their own site as opposed to being hosted at our site.  The most significant effect this could have on our financial statements is the deferral of upfront charges, for items such as installation and data conversion, which are currently recognized as revenue when the service is completed. This could have the effect of shifting revenue to future periods and reducing reported earnings in periods when our deferred revenue balances are increasing. Any such change would not affect our cash flow.  Customer orders for our products and services increased by approximately $8.3 million, or 16%, to $60.3 million in the first six months of 2010 compared to $52.0 million in the first six months of 2009.  Orders for the first six months of 2010 included an order from a large urban school district in the amount of $2.9 million. We believe that our orders for 2010 were positively affected by educational funds provided by the American Recovery and Reinvestment Act, which generally first became available to schools during the third quarter of 2009. We also believe that the year-over-year comparison was enhanced due to the weak order levels we experienced in the first half of 2009 as a result of the economic recession, which put pressure on school budgets and caused our customers to be very cautious with their spending plans.  According to the Center on Budget and Policy Priorities, federal stimulus money was an important component in helping states balance their budgets the last several years. Many states have already cut into their reserve funds and other one-time sources, so their ability to preserve funding levels, for even essential programs like education, is limited. Therefore, fiscal year 2011 state budgets will likely include deeper cuts in many areas, including education, than in the past two years.  Once a recovery in state revenue occurs, it is probable that growth in state spending for education may lag as the states address needs that have built up in other areas that require funding. Therefore, it appears that the educational funding environment could be challenging for the next few years.    -9-


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Table of Contents  Consolidated income statement data:Three Months Ended June 30,
     
     Six Months Ended June 30,2010
     
     2009
     
     2010
     
     2009Net Sales:Products
     69.3%
     
     74.5%
     
     68.5%
     
     73.0%Services
     30.7%
     
     25.5%
     
     31.5%
     
     27.0%Total net sales
     100.0%
     
     100.0%
     
     100.0%
     
     100.0%Cost of sales:Products
     17.2%
     
     18.5%
     
     16.6%
     
     16.5%Services
     30.9%
     
     33.7%
     
     32.3%
     
     34.6%Total cost of sales
     21.4%
     
     22.3%
     
     21.6%
     
     21.4%Gross profit:Products
     82.8%
     
     81.5%
     
     83.4%
     
     83.5%Services
     69.1%
     
     66.3%
     
     67.7%
     
     65.4%Total gross profit
     78.6%
     
     77.7%
     
     78.4%
     
     78.6%Operating expenses:Product development
     13.5%
     
     13.8%
     
     13.1%
     
     14.6%Selling and marketing
     32.8%
     
     29.5%
     
     32.4%
     
     30.2%General and administrative
     10.0%
     
     11.2%
     
     10.3%
     
     11.6%Total operating expenses
     56.3%
     
     54.5%
     
     55.8%
     
     56.4%Operating income
     22.3%
     
     23.2%
     
     22.6%
     
     22.2%Other, net
     0.1%
     
     0.1%
     
     0.4%
     
     0.3%Income before taxes
     22.4%
     
     23.3%
     
     23.0%
     
     22.5%Income tax provision
     8.5%
     
     8.8%
     
     7.1%
     
     8.5%Net Income
     13.9%
     
     14.5%
     
     15.9%
     
     14.0%
  The amounts above are expressed as a percentage of net sales, except that individual components of cost of sales and gross profit are shown as a percentage of their corresponding component of net sales.   Consolidated Results Three Months Ended June 30, 2010 and 2009  Net Sales. Our net sales increased by $2.5 million, or 9.1%, to $31.0 million in the second quarter of 2010 from $28.5 million in the second quarter of 2009.  Product revenue increased by $0.3 million, or 1.4%, to $21.5 million in the second quarter of 2010 from $21.2 million in the second quarter of 2009 due to an increase of $1.5 million in software products resulting from both strong orders in the period and from revenue recognized from prior periods subscription orders.  This was offset by a decrease in hardware products of $1.2 million due to a price decrease that went into effect at the beginning of 2010 and an increase in our backlog.  Service revenue increased by $2.2 million, or 31.4%, to $9.5 million in the second quarter of 2010 from $7.3 million in the second quarter of 2009 due to increases in revenue across all service areas.  The largest increases were experienced in hosting and other technical services, onsite professional development services, and remote professional development services which increased $0.7 million, $0.7 million, and $0.5 million, respectively.  Cost of Sales. The cost of sales of products decreased by $0.2 million, or 5.5%, to $3.7 million in the second quarter of 2010 from $3.9 million in the second quarter of 2009. As a percentage of product sales, the cost of sales of products decreased to 17.2% in the second quarter of 2010, compared to 18.5% for the second quarter of 2009.  This was primarily due to a revenue mix weighted more heavily to software in 2010, as our margins are higher on software than on hardware.  The cost of sales of services increased by $0.5 million, or 20.6%, to $2.9 million in the second quarter of 2010 from $2.4 million in the second quarter of 2009. As a percentage of sales of services, the cost of sales of services decreased to 30.9% in the second quarter of 2010 from 33.7% in the second quarter of 2009. The improvement was due to continued leveraging of our fixed costs in most of our service areas, especially hosting and remote professional development.    -10-


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Table of Contents  Our overall gross profit margins increased to 78.6% in the second quarter of 2010 from 77.7% in the second quarter of 2009.  Product Development. Product development expenses increased by $0.3 million, or 6.9%, to $4.2 million in the second quarter of 2010 from $3.9 million in the second quarter of 2009. The increase is attributable to higher salary expenses as a result of development efforts related to product initiatives. As a percentage of net sales, product development expenses decreased to 13.5% in the second quarter of 2010 from 13.8% in the second quarter of 2009.  Selling and Marketing. Selling and marketing expenses increased by $1.8 million, or 20.9%, to $10.2 million in the second quarter of 2010 from $8.4 million in the second quarter of 2009. Selling expenses increased by $1.6 million due to additional commissions associated with higher order levels this year and to a lesser extent more sales staff. Marketing expenses increased by $0.2 million due to higher costs for tradeshows. As a percentage of net sales, selling and marketing expenses increased to 32.8% in the second quarter of 2010 from 29.5% in the second quarter of 2009.  General and Administrative. General and administrative expenses decreased by $0.1 million, or 1.8%, to $3.1 million in the second quarter of 2010, essentially unchanged from $3.2 million in the second quarter of 2009. As a percentage of net sales, general and administrative expenses decreased to 10.0% in the second quarter of 2010 from 11.2% in the second quarter of 2009.  Operating Income. Operating income increased by $0.3 million, or 4.9%, to $6.9 million in the second quarter of 2010 from $6.6 million in the second quarter of 2009. The increase was primarily due to higher revenue, partially offset by higher selling expenses. As a percentage of net sales, operating income decreased to 22.3% in the second quarter of 2010 from 23.2% in the second quarter of 2009.  Income Tax.Income tax expense of $2.6 million was recorded in the second quarter of 2010 at an effective income tax rate of 38.1% of pre-tax income.  This compares to $2.5 million that was recorded in the second quarter of 2009 at an effective income tax rate of 37.8% of pre-tax income.   Consolidated Results Six Months Ended June 30, 2010 and 2009  Net Sales. Our net sales increased by $6.0 million, or 10.4%, to $63.3 million in the first six months of 2010 from $57.3 million in the first six months of 2009.  Product revenue increased by $1.5 million, or 3.5%, to $43.4 million in the first six months of 2010 from $41.9 million in the first six months of 2009 due to an increase of $2.1 million in software products which is a result of both strong orders in the period and from revenue recognized from prior periods subscription orders.  This was offset by a decrease in hardware products of $0.6 million due to a price decrease that went into effect at the beginning of 2010 and an increase in our backlog.  Service revenue increased by $4.4 million, or 28.8%, to $19.9 million in the first six months of 2010 from $15.5 million in the first six months of 2009 due to increases in revenue across all service areas.  The largest increases were experienced in hosting and other technical services, onsite professional development services, and remote professional development services which increased $1.8 million, $1.0 million, and $1.0 million, respectively.  Cost of Sales. The cost of sales of products increased by $0.3 million, or 4.2%, to $7.2 million in the first six months of 2010 from $6.9 million in the first six months of 2009. As a percentage of product sales, the cost of sales of products was 16.6% in the first six months of 2010, essentially unchanged from 16.5% for the first six months of 2009.  The cost of sales of services increased by $1.0 million, or 20.3%, to $6.4 million in the first six months of 2010 from $5.4 million in the first six months of 2009. As a percentage of sales of services, the cost of sales of services decreased to 32.3% in the first six months of 2010 from 34.6% in the first six months of 2009. The improvement was due to continued leveraging of our fixed costs in most of our service areas, especially hosting and remote professional development.  Our overall gross profit margins were 78.4% in the first six months of 2010, essentially unchanged from 78.6% in the first six months of 2010.    -11-


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Table of Contents  Product Development. Product development expenses were $8.3 million in the first six months of 2010, essentially unchanged from $8.4 million in the first six months of 2009. As a percentage of net sales, product development expenses decreased to 13.1% in the first six months of 2010 from 14.6% in the first six months of 2009.  Selling and Marketing. Selling and marketing expenses increased by $3.2 million, or 18.4%, to $20.5 million in the first six months of 2010 from $17.3 million in the first six months of 2009. Selling expenses increased by $3.4 million due to additional commissions associated with higher order levels this year and to a lesser extent more sales staff. Marketing expenses decreased by $0.2 million due to cost efficiencies in our advertising programs offset by higher costs for trade shows. As a percentage of net sales, selling and marketing expenses increased to 32.4% in the first six months of 2010 from 30.2% in the first six months of 2009.  General and Administrative. General and administrative expenses were $6.5 million in the first six months of 2010, essentially unchanged from $6.6 million in the first six months of 2009. As a percentage of net sales, general and administrative expenses decreased to 10.3% in the first six months of 2010 from 11.6% in the first six months of 2009.  Operating Income. Operating income increased by $1.6 million, or 12.4%, to $14.3 million in the first six months of 2010 from $12.7 million in the first six months of 2009. The increase was primarily due to higher revenue, partially offset by higher selling expenses. As a percentage of net sales, operating income increased to 22.6% in the first six months of 2010 from 22.2% in the first six months of 2009.  Income Tax.Income tax expense of $4.5 million was recorded in the first six months of 2010 at an effective income tax rate of 38.1% of pre-tax income, less a tax benefit of $1.1 million related to the settlement of an income tax dispute with the State of Wisconsin in the first quarter of 2010. This compares to $4.9 million that was recorded in the first six months of 2009 at an effective income tax rate of 37.8% of pre-tax income.   Results of Operations  Segments  Our reportable segments are:  Educational Software and Services.This segment derives its revenue from our software products; services related to our software such as product support, professional development, hosting, and other technical services; scanners sold for use with our math software; our reading intervention products; and various classroom resources such as printed materials and motivational items.  Educational Hardware.This segment derives its revenue from ourNEOs, 2Know! classroom response systems, and services such as professional development, and extended support plans sold in connection with these hardware products.  Segment results:Three months ended June 30,
     
     Six months ended June 30,(Dollars in Thousands)
     
     2010
     
     2009
     
     2010
     
     2009Educational Software and Services Segment:Revenues
     
     $
     25,601
     
     $
     21,864
     
     $
     52,211
     
     $
     45,893Gross profit
     
     
     21,777
     
     
     18,777
     
     
     44,208
     
     
     39,342Gross profit %
     
     
     85.1
     %
     
     85.9
     %
     
     84.7
     %
     
     85.7
     %Educational Hardware Segment:Revenues
     
     $
     5,446
     
     $
     6,600
     
     $
     11,059
     
     $
     11,442Gross profit
     
     
     2,622
     
     
     3,329
     
     
     5,425
     
     
     5,732Gross profit %
     
     
     48.2
     %
     
     50.4
     %
     
     49.1
     %
     
     50.1
     %
    -12-


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Table of Contents  Educational Software and Services Segment Three months Ended June 30, 2010 and 2009  Segment revenues increased by $3.7 million, or 17.1%, to $25.6 million in 2010 from $21.9 million in 2009. This improvement was primarily due to increased revenue from our subscription-based software products and related services, such as hosting, phone support, and technical services.  Gross profit increased by $3.0 million to $21.8 million in 2010 from $18.8 million in 2009.  As a percentage of revenue, gross profit was relatively unchanged at 85.1% in 2010 compared to 85.9% in the prior year.  Educational Software and Services Segment Six months Ended June 30, 2010 and 2009  Segment revenues increased by $6.3 million, or 13.8%, to $52.2 million in 2010 from $45.9 million in 2009. This improvement was primarily due to increased revenue from our subscription-based software products and related services, such as hosting, phone support, and technical services.  Gross profit increased by $4.9 million to $44.2 million in 2010 from $39.3 million in 2009.  As a percentage of revenue, gross profit was relatively unchanged at 84.7% in 2010 compared to 85.7% in the prior year.  Educational Hardware Segment Three months Ended June 30, 2010 and 2009  Segment revenues decreased by $1.2 million, or 17.5%, to $5.4 million in 2010 from $6.6 million in 2009. Segment revenues decreased primarily due to a price decrease that went into effect at the beginning of 2010.  Revenue during the current period was also held back by about $0.6 million due to a shortage of inventory related to the higher unit sales this segment has experienced in 2010.  Gross profit decreased by $0.7 million to $2.6 million in 2010 from $3.3 million in 2009.  As a percentage of revenue, gross profit decreased to 48.2% in 2010, from 50.4% in 2009. The decline is attributable to the hardware sales price decrease, discussed above.  Educational Hardware Segment Six months Ended June 30, 2010 and 2009  Segment revenues decreased by $0.3 million, or 3.3%, to $11.1 million in 2010 from $11.4 million in 2009. Segment revenues decreased primarily due to a price decrease that went into effect at the beginning of 2010.   Revenue during the current period was also held back by about $0.6 million due to a shortage of inventory related to the higher unit sales this segment has experienced in 2010.  Gross profit decreased by $0.3 million to $5.4 million in 2010 from $5.7 million in 2009.  As a percentage of revenue, gross profit was relatively unchanged at 49.1% in 2010, and 50.1% in 2009.  Liquidity and Capital Resources  As of June 30, 2010, our cash, cash equivalents and investment securities were $49.2 million, up $5.1 million from $44.1 million at December 31, 2009. The increase was primarily due to $10.4 million of cash flow provided by operations offset in part by $4.4 million used to pay dividends.  As of June 30, 2010, we have a $15.0 million secured revolving line of credit with a bank which is available until July 1, 2012. The line of credit bears interest at either a floating rate or a fixed rate for a period of up to 90 days based on LIBOR plus 1.5%. The rate is at our option and is determined at the time of borrowing. We also have a $2.0 million unsecured revolving line of credit with a bank available until July 31, 2011, which bears interest at the prime rate. As of June 30, 2010, the lines of credit had not been used.  On April 17, 2002, our Board of Directors authorized a repurchase program which provides for the repurchase of up to 5.0 million shares of our common stock. On February 9, 2005, our Board of Directors authorized the repurchase of an additional 3.0 million shares under the stock repurchase program. On February 6, 2008, our Board of Directors authorized the repurchase of an additional 1.0 million shares under the stock repurchase program.    -13-


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Table of Contents  No time limit was placed on the duration of the repurchase program, nor is there any dollar limit on the program. We repurchase shares on the open market as well as from employees who elect to surrender restricted shares at the time of vesting to pay their payroll withholding taxes. Repurchased shares will become treasury shares and may be used for equity compensation plans, stock-based employee benefit plans and for other general corporate purposes. From January 1, 2010 through June 30, 2010, we repurchased approximately 13,300 shares at a cost of $197,000. Since the original authorization of the repurchase program in 2002, we have repurchased approximately 7.8 million shares at a cost of $135.3 million. Depending on our stock valuation, cash availability and other factors, we may repurchase additional shares as a beneficial use of our cash to enhance shareholder value.  In each of the four quarters of 2009 we paid a cash dividend of $0.07 per share. In the first quarter of 2010 we paid a cash dividend of $0.07 per share. In the second quarter of 2010 we paid a cash dividend of $0.08 per share. On July 21, 2010, our Board of Directors declared a quarterly cash dividend of $0.08 per share, payable September 1, 2010 to shareholders of record as of August 6, 2010.  We intend to continue to pay quarterly cash dividends, subject to capital availability and a determination that cash dividends continue to be in the best interests of the company and our shareholders.  We believe our strong cash position coupled with cash flow from operations will be sufficient to meet both our short-term and long-term working capital requirements.   Off-Balance Sheet Arrangements and Aggregate Contractual Obligations  We do not have any off-balance sheet transactions, arrangements or obligations (including contingent obligations), that would have a material effect on our financial results.  Operating Leases.We enter into operating leases, primarily for facilities that we occupy in order to carry out our business operations. We utilize operating leases for some of our facilities to gain flexibility as compared to purchasing facilities outright and to limit our exposure to many of the risks of owning commercial property, particularly with regard to international operations. These agreements are generally for terms of one to five years. Some of the leases have early termination clauses, but they generally cannot be terminated by either the lessor or us for reasons other than breach of the lease agreement. We do not anticipate the early termination of any significant lease agreement.  Purchase Obligations.We enter into commitments with certain suppliers to purchase our hardware products, such asNEOs,AccelScanscanners and the2Know!response system. The majority of these obligations will be satisfied within one year.  Tax Audit Settlements and Deposits. We do not anticipate making any significant cash payments related to the settlement of tax audits or deposits for unsettled audit issues in 2010. Estimation of the amounts and timing of payments in periods after 2010 are highly uncertain and therefore are not included in the table.  As of June 30, 2010, our approximate contractual obligations for operating leases, tax audit payments and purchase obligations (by period due) were as follows:  Payments Due by Period(In Thousands)
     
     Total
     
     Less than
1 year
     
     1-3
years
     
     3-5
years
     
     More than
 5 yearsOperating lease obligations
     
     $
     3,087
     
     $
     674
     
     $
     1,703
     
     $
     709
     
     $
     1Tax audit related payments
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     Purchase obligations
     
     
     8,024
     
     
     8,007
     
     
     17
     
     
     
     
     
     Total
     
     $
     11,111
     
     $
     8,681
     
     $
     1,720
     
     $
     709
     
     $
     1
   Critical Accounting Policies and Estimates  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. There have been no significant changes to our critical accounting policies that were disclosed in our 2009 Annual Report.    -14-


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Table of Contents  Forward-Looking Statements  In accordance with the Private Securities Litigation Reform Act of 1995, we can obtain a safe-harbor for forward-looking statements by identifying those statements and by accompanying those statements with cautionary statements which identify factors that could cause actual results to differ materially from those in the forward-looking statements. Accordingly, the foregoing Managements Discussion and Analysis of Financial Condition and Results of Operations and the following Quantitative and Qualitative Disclosures about Market Risk may contain certain forward-looking statements regarding strategic growth initiatives, growth opportunities and managements expectations regarding orders and financial results for 2010 and future periods. These forward-looking statements are based on current expectations and current assumptions which management believes are reasonable. However, these statements involve risks and uncertainties that could cause actual results to differ materially from any future results encompassed within the forward-looking statements. Factors that could cause or contribute to such differences include: (i) the failure of orders to achieve expected growth targets, (ii) a decline in quiz sales that exceeds forecasts, (iii) risks associated with the implementation of the Companys growth initiatives, (iv) dependence on educational institutions and government funding, (v) our ability to successfully implement cost savings measures and achieve cost reductions and (vi) other risks affecting the Companys business as described in the Companys filings with the Securities and Exchange Commission, including the Companys 2009 Annual Report on Form 10-K and later filed quarterly reports on Form 10-Q and Current reports on Form 8-K, which factors are incorporated herein by reference. The company expressly disclaims a duty to provide updates to forward-looking statements, whether as a result of new information, future events or other occurrences.   Item 3.Quantitative and Qualitative Disclosures About Market Risk  Interest Rate Risk. Our exposure to market interest rate risk consists of: (i) the increase or decrease in the amount of interest income we can earn on our investment portfolio and (ii) the decrease or increase in the value of our investment security portfolio if market interest rates increase or decrease, respectively. We anticipate that we will have sufficient liquidity to hold our investments to maturity; therefore, we do not expect to recognize any material losses or gains related to an increase or decrease in market interest rates.  Market Risk.Our exposure to market risk relates to the quality of the holdings in our investment security portfolio. The fair market value of our investments is subject to increases or decreases in value resulting from the performance of the securities issuer, from upgrades or downgrades in the creditworthiness of the securities issuer, upgrades or downgrades in the creditworthiness of the insurer of the securities, and from changes in general market conditions.  We seek to manage our exposure to market risk by investing in accordance with our corporate investment policy as established by our Board of Directors. The goals of the policy are: (i) preservation of capital, (ii) provision of adequate liquidity to meet projected cash requirements, (iii) minimization of risk of principal loss through diversification, and (iv) maximization of yields in relationship to the guidelines, risk, market conditions and tax considerations.  Our investment policy permits investments in obligations of the U.S. Treasury department and its agencies, money market funds and, high quality investment-grade corporate and municipal interest-bearing obligations. The policy requires diversification to prevent excess concentration of issuer risk and requires the maintenance of minimum liquidity levels. The policy precludes investment in equity securities except for the specific purpose of funding the obligations related to our Supplemental Executive Retirement Plan. As of June 30, 2010, our investment securities had a market value of approximately $8.2 million and a carrying value of $8.2 million. Due to the type and duration of our investments, we do not expect to realize any material gains or losses related to market risk.  Foreign Currency Exchange Rate Risk. The financial position and results of operations of our foreign subsidiaries are measured using local currency. Revenues and expenses of such subsidiaries have been translated into U.S. dollars using average exchange rates prevailing during the period. Assets and liabilities have been translated at the rates of exchange on the balance sheet date. Translation gains or losses are deferred as a separate component of shareholders equity. Aggregate foreign currency transaction gains and losses are included in determining net income. As such, our operating results are affected by fluctuations in the value of the U.S. dollar compared to the British pound, Canadian dollar, and the Euro. At this time, foreign exchange rate risk is not significant due to the relative size of our foreign operations and revenues derived from sales in foreign currencies.    -15-


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Table of Contents  Item 4.Controls and Procedures  We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating our disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and management was necessarily required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.  As of June 30, 2010, an evaluation was performed under the supervision and with the participation of management, including our CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, management, including the CEO and CFO, concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC.  There has been no change in our internal control over financial reporting that has occurred during the quarter ended June 30, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.   Part II - OTHER INFORMATION  Item 1A.Risk Factors  There have been no material changes from risk factors previously disclosed in our 2009 Annual Report in response to Item 1A to Part I of Form 10-K.   Item 2.Unregistered Sales of Equity Securities and Use of Proceeds  On April 17, 2002, our Board of Directors authorized a stock repurchase program which provides for the repurchase of up to 5.0 million shares of our common stock. On February 9, 2005, our Board of Directors authorized the repurchase of an additional 3.0 million shares under the stock repurchase program. On February 6, 2008, our Board of Directors authorized the repurchase of an additional 1.0 million shares under the stock repurchase program.  No time limit was placed on the duration of the repurchase program, nor is there any dollar limit on the program. We repurchase shares on the open market as well as from employees who elect to surrender restricted shares at the time of vesting to pay their payroll withholding taxes. Repurchased shares will become treasury shares and may be used for equity compensation plans, stock-based employee benefit plans and for other general corporate purposes.  The following table shows information relating to the repurchase of shares of our common stock during the three months ended June 30, 2010:  Period
     
     Total number
 of  shares 
repurchased
     
     Average
 price paid
per share
     
     Total number of
shares purchased
 as part of publicly
announced plans
or programs
     
     Maximum number
 of shares that may
 yet be purchased
under the plans
or programsApril 1-30
     
     
     11,578
     
     $
     15.15
     
     
     11,578
     
     
     1,199,587May 1-31
     
     
     
     
     
     
     
     
     
     
     
     1,199,587June 1-30
     
     
     
     
     
     
     
     
     
     
     
     1,199,587Total
     
     
     11,578
     
     
     
     
     
     11,578
    -16-


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Table of Contents  Item 6.Exhibits  Exhibits.  Exhibit No.
     Description10.1
     Third Amendment to Credit Agreement and Revolving Line of Credit Note dated as of May 21, 2010 by and between Wells Fargo Bank, National Association and Registrant10.2
     Offer of Employment for Glenn R. James dated July 1, 2010(1)31.1
     Section 302 certification by Glenn R. James31.2
     Section 302 certification by Mary T. Minch32.1
     Section 906 certification by Glenn R. James32.2
     Section 906 certification by Mary T. Minch________________________
(1)      Incorporated by reference to Registrants Form 8-K filed on July 7, 2010 (SEC File No. 0-22187)
    -17-


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Table of Contents  SIGNATURES   Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.  RENAISSANCE LEARNING, INC.(Registrant)August 6, 2010
     
     /s/ Glenn R. JamesDate
     
     Glenn R. James
Chief Executive Officer and a Director
(Principal Executive Officer)August 6, 2010
     
     /s/ Mary T. MinchDate
     
     Mary T. Minch
Executive Vice President-Finance, Chief Financial Officer and
Secretary (Principal Financial and Accounting Officer)
    -18-


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Table of Contents  Index to Exhibits  Exhibit No.
     Description10.1
     Third Amendment to Credit Agreement and Revolving Line of Credit Note dated as of May 21, 2010 by and between Wells Fargo Bank, National Association and Registrant10.2
     Offer of Employment for Glenn R. James dated July 1, 2010(1)31.1
     Section 302 certification by Glenn R. James31.2
     Section 302 certification by Mary T. Minch32.1
     Section 906 certification by Glenn R. James32.2
     Section 906 certification by Mary T. Minch________________________
(1)      Incorporated by reference to Registrants Form 8-K filed on July 7, 2010 (SEC File No. 0-22187)


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